10-year TIPS reopening auction gets real yield of 1.935% after Fed-triggered dip

Posted on March 20, 2025 by Tipswatch

By David Enna, Tipswatch.com

Over the years, I have been known to rail against Federal Reserve commentary coming on the eve of auctions of Treasury Inflation-Protected Securities. So often, it seemed, a fairly attractive auction ended up with a mediocre real yield, thanks to the Fed.

This more or less happened yesterday, with Federal Reserve Chairman Jay Powell issuing a remarkably mixed message: 1) we can (possibly) expect two more rate cuts this year, 2) we can (probably) expect higher inflation this year and next, and 3) we can (probably) expect slower economic growth and higher unemployment this year and next.

Given all that, the Fed decided to hold short-term interest rates at current levels but also to slow down the pace of its balance-sheet reductions, which could help lower longer-term interest rates.

To me, that message seemed to forecast “stagflation,” a combination of higher inflation and slower economic growth. But the stock and bond markets were pleased. For one day, stock prices surged higher and bond yields fell.

And the result could be seen in today’s Treasury offering of $18 billion in a reopened CUSIP 91282CML2, creating a 9-year, 10-month TIPS. Most of the week, this TIPS looked likely to get a real yield somewhere in the range of 1.98% to 1.99%, but today’s result was a bit lower: a real yield of 1.935%.

That’s not really so bad. This TIPS was trading on the secondary market earlier Thursday with a real yield of 1.87%, gradually rising to 1.91%. The “when-issued” prediction, revealed just before the auction’s close, was 1.93%. The bid-to-cover ratio was 2.35, indicating lukewarm demand.

In this case, my preview article’s advice to buy this TIPS on the secondary market earlier in the week was correct. Real yields of around 2.0% were available before Powell spoke. (But trust me, it doesn’t always work out that way.)

The truth: This auction result is not bad at all. A real yield of 1.935% is attractive by historical standards, even if it is a bit below recent trends. Here is the trend in the 10-year real yield over the last two years:

Click on image for larger version.

The longer-term trend shows more clearly the historic value of today’s higher real yields:

Pricing

CUSIP 91282CML2 carries a coupon rate of 2.125%, set by the originating auction on Jan. 23. Because today’s auctioned real yield came in below the coupon rate, investors had to pay a premium price of 101.685184. In addition, this TIPS will have an inflation index of 1.00639 on the settlement date of March 31.

With that information, we can calculate the investment cost of $10,000 par value at this auction.

  • Par value: $10,000.
  • Actual principal purchased: $10,000 x 1.00639 = $10,063.90.
  • Cost of investment: $10,063.90 x 1.01685184 = $10,233.50
  • + accrued interest of $44.30

To sum up, an investor purchasing $10,000 par value at auction paid $10,233.50 for $10,063.90 in principal. From then on, the investor will earn inflation accruals plus 2.125% interest on inflation-adjusted principal over the next 9 years, 10 months.

Inflation breakeven rate

With a 10-year nominal Treasury note yielding 4.23% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.30%, a bit lower than recent trends. This means it will out-perform the nominal Treasury if inflation averages more than 2.30% over the next 10 years.

Here is the trend in the 10-year inflation breakeven rate over the last two years, showing the sharp decline in inflation sentiment in recent weeks:

Thoughts

Let’s be realistic: A real yield of 1.935% is fine, even if it falls a bit short of the coveted 2.0% mark. It’s a good return on a very safe investment, especially if held to maturity.

While I watched Powell’s news conference yesterday, I was fascinated by his repeated use of the term “uncertainty” when describing current economic conditions. He said:

“I don’t know anyone who has a lot of confidence in their forecast. Forecasting is always really, really hard. And in the current situation, uncertainty is remarkably high.”

From today’s Wall Street Journal report:

Officials projected weaker growth, higher unemployment and higher inflation than they had anticipated in December. Moreover, nearly all officials judged that if their forecasts were to be proven wrong, it would be in the direction of even softer growth, more joblessness and firmer price growth.

A combination of stagnant growth and higher prices, sometimes called stagflation, could make it harder for the Fed to cut interest rates this year to pre-empt any slowdown.

So should we expect big moves in Treasury yields in coming months? Definitely not in short-term rates, where the Fed will hold policy stable. Longer-term rates are “going with the flow,” and I have no idea where that flow is heading.

So getting an above-inflation yield of 1.935% for nearly 10 years on a very safe investment looks like a sensible path, at least for a portion of your overall portfolio.

Here is the history of 9- to 10-year TIPS auctions over the last four years:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Federal Reserve, Inflation, Investing in TIPS | Tagged , , , , , | 8 Comments

Here’s another chance to get a 2% above-inflation yield for nearly 10 years

Posted on March 16, 2025 by Tipswatch

Treasury will auction a reopened 10-year TIPS on Thursday.

By David Enna, Tipswatch.com

March 20, 2025 update: 10-year TIPS reopening auction gets real yield of 1.935% after Fed-triggered dip

Real yields have been quite volatile through 2025, with the yield on a 10-year Treasury Inflation-Protected Security falling 54 basis points from a high of 2.34% on January 10 to a low of 1.80% on March 3. That’s a big drop.

But now things have turned around, with the 10-year real yield inching above 2.0% at the market close on Friday. That’s a positive development for investors leading into the Treasury’s reopening auction Thursday of CUSIP 91282CML2, creating a 9-year, 10-month TIPS.

This TIPS had an originating auction two months ago, at the time generating a real yield to maturity of 2.243%, the highest for this term in 16 years. The auction set its coupon rate at 2.125%, also the highest in 16 years.

CUSIP 91282CML2 trades on the secondary market, where it closed Friday with a real yield of 2.00% and a price of 101.09, which is at a premium because the market real yield has now dipped below the coupon rate of 2.125%.

Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 2.0% means an investment in this TIPS would provide a return that exceeds U.S. inflation by 2.0% for 9 years, 10 months.

Opinion: If you can find 10-year TIPS with a real yield at or near 2.0%, it is a worthwhile investment, as long as you can hold to maturity. Yes, real yields could continue rising, but 2.0% is historically an attractive yield, as demonstrated in this chart showing the trend over the last 15 years:

Click on image for larger version.

Side note: Thursday’s auction size is $18 billion, the largest in history for a 10-year TIPS reopening auction. It is up 12.5% from the $16 billion size of the similar auction in March 2024. This does indicate the Treasury, and the bond market, are committed to TIPS.

And this: Although TIPS have been a fairly reviled investment since a highly negative year in 2022 (total return down 12.2%), this investment class has been doing well in 2025’s volatile markets. The TIP ETF — which holds the full range of maturities — has had a total return of 2.7% year to date, compared to -4.0% for the S&P 500.

Look to the secondary market

Because of the current volatility, I’d recommend skipping this auction (unless you wish to buy at TreasuryDirect) and look for attractive yields on CUSIP 91282CML2 on the secondary market, through your broker. A lot can change before Thursday’s auction closes at 1 p.m. ET. On the secondary market, you can lock in a real yield you find attractive.

Saturday morning, Fidelity was listing CUSIP 91282CML2 with a real yield to maturity of 2.01%. Of course, things will change by Monday. If you want to invest in this TIPS, it’s worth checking the secondary market.

The advantage of buying at auction, especially through TreasuryDirect, is that even small-lot purchases will get the auction’s high yield. The advantage of the secondary market is that you can see exactly the price and real yield you will be receiving. The negative is that you may face a small bid-ask spread. Most of the time, it doesn’t make a huge difference, but if you see a real yield you like, know that you can probably get it on the secondary market without dealing with the auction’s uncertainty.

Pricing

At Friday’s close, CUSIP 91282CML2 was trading with a price of 101.09. Plus, it will have an inflation index of 1.00639 on the settlement date of March 31. With that information, we can estimate the investment cost of $10,000 par value of this TIPS:

  • Par value: $10,000.
  • Actual principal purchased: $10,000 x 1.00639 = $10,063.90.
  • Cost of investment: $10,063.90 x 1.0109 = $10,173.60.
  • + accrued interest of about $43.

In summary, at Friday’s pricing, an investor would pay $10,173.60 for $10,063.90 of principal on the March 31 settlement date, and then earn accruals matching future inflation plus an annual coupon of 2.125% for 9 years, 10 months. This is just an estimate. The market will change by the Thursday auction.

Inflation breakeven rate

At Friday’s close, a 10-year Treasury note had a nominal yield of 4.31%, giving this TIPS an inflation breakeven rate of 2.31%, relatively high by historical standards but a bit lower than recent auctions of this term. Inflation over the last 10 years, through February, has averaged 3.1%.

Here is the trend in the 10-year inflation breakeven rate over the last 15 years, showing the recent stability in the area around 2.25%:

Click on image for larger version.

Thoughts

I was a buyer at the January auction, filling the amount I needed for the 2035 rung of my TIPS ladder. So I won’t be a buyer this week. As I noted above, investors could decide to skip this auction because of the uncertainty caused by volatility, and instead look to lock in an attractive real yield on the secondary market.

If you do make an investment on the secondary market, place a note in the comments to tell us how you did.

CUSIP 91282CML2 will be reopened again at auction on May 22, 2025, and then a new 10-year TIPS will be issued July 24.

This TIPS auction closes Thursday at 1 p.m. ET. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.

I will be posting the auction results soon after the close on Thursday. Here is a history of auction results for this term over the last 5 years:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Inflation, Investing in TIPS, TreasuryDirect | Tagged , , , | 4 Comments

February inflation brings good news for markets

Posted on March 12, 2025 by Tipswatch

Annual rates for both all-items and core inflation fell from January levels and came in under expectations.

By David Enna, Tipswatch.com

Finally, some good news on inflation. The February inflation report just released by the Bureau of Labor Statistics shows inflation moderating, with annual rates for both all-item and core inflation declining.

All-items inflation, measured on a seasonally adjusted basis, came in at 0.2% for the month and 2.8% for the year. Core inflation, which removes food and energy, was 0.2% for the month and 3.1% for the year. This was below expectations, and also below January’s annual numbers of 3.0% for all-items and 3.3% for core.

The BLS noted that shelter costs rose 0.3% in February, accounting for nearly half the February all-items increase. Shelter costs were up 4.2% for the year, but the BLS noted that was the smallest 12-month increase since December 2021. Also from the report:

  • Food at home prices were unchanged for the month and up 1.9% for the year.
  • The price of eggs was up 10.4% for the month and a frightening 58.8% for the year.
  • Gasoline prices fell 0.9% and are now down 3.2% annually.
  • Electricity costs, however, were up 1.0% for the month and 2.5% for the year.
  • Costs of used cars and trucks rose 0.9% for the month but are up only 0.8% over 12 months.
  • New vehicle prices fell 0.1% for the month and are down 0.3% for the year.
  • Airline fares fell a sharp 4.0% for the month and are down 0.7% for the year.
  • Costs of motor vehicle insurance rose 0.3% for the month and are up 11.1% for the year.

Here is the 12-month trend in annual all-items and core inflation, showing how both all-items and core inflation broke lower in February, with core reaching its lowest annual level since April 2021:

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates for I Bonds. For February, the BLS set the inflation index at 319.082, an increase of 0.44% over the January number.

For TIPS. The February inflation index means that principal balances for all TIPS will increase by 0.44% in April, after rising 0.65% in January. Keep in mind it is normal for early-year non-adjusted inflation to run higher than the adjusted CPI. That will reverse later in the year. Here are the April Inflation Indexes for all TIPS.

For I Bonds. February marks the fifth of a six-month string that will determine the I Bond’s new variable rate, which will be reset on May 1 and eventually roll into effect for all I Bonds. As of February, with one month remaining, inflation has increased 1.20%, which would translate to a variable rate of 2.4%. The March number seems likely to push that up to about 3.0%, much higher than the current 1.90%.

This trend is going to make I Bonds an interesting investment in 2025, potentially offering a composite rate of about 4.1% or 4.2% for six months, at a time when short-term rates could be declining. I’ll have more on that after the March inflation report is issued on April 10. Here are the data so far:

View historical data on my Inflation and I Bonds page.

What this means for future interest rates

The February inflation report provides good news for the Federal Reserve, with annual inflation finally moderating after increasing from 2.4% in September 2024 to 3.0% in January. As it stands, 2.8% for all-items and 3.1% for core remains too high. But the upward creep has ended.

There are still a lot of unknowns, with the effects of tariffs, federal layoffs, deportations and a potentially weakening economy lingering out there in our future. On balance, I’d say the possibility of short-term rate cuts in 2025 has been increasing. But the key question is: Can inflation continue moderating?

From this morning’s Bloomberg report:

While Wednesday’s report offers some relief, several measures still indicate that inflation is rearing back up again. And with President Donald Trump rolling out a series of tariffs, prices are expected to rise on a variety of goods from food to clothing, testing the resilience of consumers and the broader economy. …

“The combination of easing inflationary pressures and rising downside risks to growth suggest that the Fed is moving closer to continuing its easing cycle,” Kay Haigh, global co-head of fixed income and liquidity solutions in Goldman Sachs Asset Management, said in a note.

And the Wall Street Journal:

Wednesday’s report largely predates President Trump’s recent tariff actions, which means the full effect of the new tariffs aren’t captured.

My reaction is: This February inflation report takes a positive (but small) step toward lower inflation. A lot of uncertainty remains. The Fed will be on hold for the near term.

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in I Bond, Inflation, Investing in TIPS | Tagged , , , , , , | 22 Comments

I Bond’s fixed rate could fall at May 1 reset. Or not.

Posted on March 9, 2025 by Tipswatch

5-year real yields are declining. What does it mean for TIPS and I Bonds?

By David Enna, Tipswatch.com

April 11, 2025, update: Welcome to the I Bond ‘buying season’

April 10, 2025, update: I Bond’s variable rate will rise to 2.86% on May 1

April 3, 2025, update: My I Bond fixed-rate projection just fell to 1.10%

I’ve just returned from 3+ weeks in very southern South America — much of the time with limited internet access — and gosh, you folks have been busy.

Tariffs on. Tariffs off. Stock market down, up, then down. Treasury yields all over the place. Although I could monitor news some of the time, I am a bit lost about what’s been happening.

During that time away, I had three interview requests from separate Wall Street Journal reporters, plus NPR and Bottom Line. Something was triggering interest. At least twice during the trip, I noticed the 5-year real yield had fallen midday to 1.30%, down from 1.74% when I left on February 10. Things have stabilized a bit, but volatility is obviously a key market factor in March 2025.

In this brief time, the real yield of a 5-year Treasury Inflation-Protected Security has fallen much farther than the yield of the 10-year TIPS. Note in this one-year chart how the two yields tracked closely until October 2024, and then have widened dramatically:

Click on image for larger version.

The gap between the current 5-year real yield (1.57%) and the 10-year (1.99%) has been partially caused by higher inflation expectations over the next 5 years, now at 2.57%, compared with the 10-year inflation expectation at 2.35%. For a long period of 2024, the 10-year inflation breakeven rate was running higher than the 5-year.

Markets are concerned about future inflation, and that increases demand for TIPS, which in turn lowers yields. From a Bloomberg article this week:

But rising inflation is a real possibility now even if many investors are bracing for rate cuts, said Nicolas Trindade, who runs a number of funds at AXA Investment Managers. He expects volatility to increase amid the unpredictable economic strategy.

“The main risk for 2025 is a sharp resurgence in US inflation on the back of tariffs, tax cuts and immigration restrictions that could lead the Fed to open the door to hiking interest rates again,” he said. “The market is definitely not priced for that.”

This comparison of the real yields is important now for several reasons:

  • On March 20, the Treasury will reopen a 10-year TIPS at auction. The real yield at this point would be 1.99%, a decline from 2.243% at the originating auction on Jan. 23. That’s down about 25 basis points.
  • Then, on April 17, a new 5-year TIPS will be issued at auction. At this point the real yield looks likely to be about 55 basis points lower than the 2.121% set in the last auction of this term, a reopening on Dec. 19, 2024.
  • And two weeks after that auction, the Treasury will reset the I Bond’s fixed interest rate for purchases from May to October 2025. My analysis of data through March 7 indicates the new fixed rate could hold at 1.20%, or potentially drop to 1.10%.

The 5-year real yield is key

The Treasury has never revealed a formula for setting the I Bond’s fixed rate, but it has stated it looks at real yield trends over time. TreasuryDirect has provided this cryptic information:

The Secretary of the Treasury, or the Secretary’s designee, determines the fixed rate. The rate is based on market rates that have been adjusted to account for the value of components unique to savings bonds. These include the early redemption put option, tax deferral feature, deferred purchase feature, and Treasury’s administrative costs.

I Bond watchers have observed that over the last decade one formula has accurately predicted the Treasury’s fixed rate decision: Apply a ratio of 0.65 to the average 5-year real yield over the preceding six months. This formula has worked without fail at least since 2017.

So now I am going to use that formula to look at how recent declining real yields could affect the Treasury’s May 1 decision. Here are the data:

I include the 10-year TIPS data in this chart simply as a back-check, but it is interesting to note that 10-year real yields would point to a higher fixed rate of 1.40%. (The fixed rate is always rounded to the one-tenth decimal.) But … ignore that. The 10-year real yield hasn’t been a reliable indicator of the rate reset.

At this point, as of March 7, 2025, the average real yield of a 5-year TIPS since November 1, 2024, has been 1.82%, much higher than the current rate of 1.57%. Applying a ratio of 0.65 to 1.82% gets you to 1.18%, which rounds to 1.20%, same as the current fixed rate.

So, yes, the fixed rate could hold at 1.20%.

But what if the 5-year real yield stays around this 1.57% level through April, or goes lower? If that happens, the I Bond’s fixed rate is likely to decline to 1.10%, at least. There are 57 market days remaining until late April. If you add in 57 days at 1.57%, the real yield average drops to 1.132%, which would round to 1.10%.

So, yes, the fixed rate could drop to 1.10%.

What we don’t know

The Trump administration could decide to ditch the long-standing formula for setting the I Bond’s fixed rate. That is certainly possible. Remember, there is no set formula required by law. Keep that in mind.

Or, maybe it could eliminate the savings bond program entirely, cutting off all new issues? Highly improbable, I’d say.

Also, real yields have been highly volatile over the last month and may continue to rise and fall unpredictably. We’ll have more certainty by mid-April.

Also read: A great mystery: I Bond buying guide for 2025

Suggested strategy: Wait

Maybe you haven’t noticed, but I Bonds are getting more and more attractive as the 5-year TIPS yield declines. An I Bond can be redeemed after 5 years with no penalty, so it is directly comparable to a 5-year TIPS, but has advantages of tax deferral, better deflation protection and no market fluctuations.

An I Bond with a fixed rate of 1.20% is more attractive than a TIPS with a real yield of 1.30% or 1.40%, in my opinion. So if TIPS yields continue declining, I Bonds with a fixed rate of 1.20% — or even 1.10% — will remain attractive.

My opinion: The best strategy for investing in I Bonds in 2025 is to wait at least until April 10, when the March inflation report will be released. Then you will know for certain what the new variable rate will be (probably higher than the current 1.90%) and have a better idea of the potential fixed-rate reset.

I am thinking an investment near the end of April will make the most sense. There is no harm in waiting. But if the fixed rate looks likely to rise, May would be the better choice. I will have more to say on this topic in mid-April.

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in I Bond, Inflation, Investing in TIPS, Retirement | Tagged , , , | 46 Comments

30-year TIPS auction gets real yield of 2.403%, highest in 23 years

Posted on February 20, 2025 by Tipswatch

By David Enna, Tipswatch.com

The market for Treasury Inflation-Protected Securities made a bit of history today, with the auction of $9 billion in a new 30-year TIPS getting a real yield of 2.403%, the highest for this term since October 2001.

Of course, we have to recognize that the Treasury stopped issuing 30-year TIPS from October 2001 to February 2010. Since that restart, no 29- to 30-year TIPS auction has received a real yield higher than 2.29%. Until today.

This is CUSIP 912810UH9, and the auction sets its coupon rate at 2.375%, also the highest for this term in 23 years. The auction appears to have come in right on target. The “when-issued” yield prediction — revealed just before the close at 1 p.m. EST — was very close at 2.400%. The bid-to-cover ratio was a solid 2.48.

This is a good result for investors, who will earn 2.403% over official U.S. inflation for the next 30 years. Just a reminder: As recently as March 9, 2022 — less than three years ago — the nominal yield on a 30-year Treasury bond was 2.29%, less than the real yield of today’s result. This is a nice turn for investors seeking safety.

Here is the trend in the 30-year real yield over the last five years, showing the remarkable surge higher after the end of the Federal Reserve’s pandemic-era quantitative easing in March 2022:

Click on image for larger version.

Pricing

This is a new TIPS, so investors could be assured that the coupon rate (2.375%) would be set slightly below the real yield of 2.403%. That resulted in a discounted unadjusted price of 99.403433. In addition, this TIPS will have an inflation index of 1.00016 on the settlement date of February 28.

With this information, we can calculate the exact cost of a purchase of $10,000 par value of this TIPS at today’s auction:

  • Par value: $10,000.
  • Adjusted principal purchased: $10,000 x 1.00016 = $10,001.60
  • Cost of investment: $10,001.60 x 0.99403433 =$9,941.93
  • + accrued interest of $8.53

In summary, an investor buying $10,000 par of this TIPS at today’s auction paid $9,941.93 for $10,001.60 of principal and will now earn inflation adjustments equal to inflation for 30 years, plus an annual coupon of 2.375% paid on inflation-adjusted principal.

Inflation breakeven rate

At the auction’s close, the 30-year Treasury bond was trading with a nominal yield of 4.74%, meaning this TIPS gets an inflation breakeven rate of 2.34%, a bit high compared to recent trends. This reflects a lack of investor confidence in the Federal Reserve’s ability to put tight controls on future inflation. Inflation over the last 30 years, ending in January, has averaged 2.5%.

Here is the trend in the 30-year inflation breakeven rate over the last five years, showing how inflation expectations have been locked in a narrow pattern (but highish) for the last three years:

Thoughts

This is a very good result for investors who can accept the 30-year time frame and hold to maturity. CUSIP 912810UH9 is the most attractive 30-year TIPS issued in 24 years, in my opinion. But I wasn’t a buyer because the long maturity doesn’t fit into my likely lifespan.

We are heading into uncertain economic times. Both real and nominal yields could be heading higher. Still, getting 2.403% over inflation for 30 years, guaranteed, is attractive and sensible, in my opinion.

Here is a history of TIPS auctions of this term over the last five years:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• TIPS investor: Don’t over-think the threat of deflation

• Upcoming schedule of TIPS auctions

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear. Please stay on topic and avoid political tirades. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Federal Reserve, Inflation, Investing in TIPS, TreasuryDirect | Tagged , , , , | 28 Comments